What are they for and why might you need one in your business?
Business valuations are useful in a number of scenarios, including:
1) When you are looking to exit and sell the business for maximum value. How do you know what price to
negotiate if you don’t know what the business is worth?
2) When there is a shareholder disagreement, or one shareholder wants to leave and sell their shares.
3) Retirement planning.
Selling the business to a third party
One of the main reasons for getting a business valuation is to understand how much that business would be worth on sale. Getting a good understanding of what it is worth, and how the valuation has been put together (along with any discount factors) means you won’t be tempted to accept an offer that is too low. Or vice versa, an initial high offer to tempt you in that will never be achievable when the sale goes ahead.
Selling the business is an emotionally demanding event that, for most business owners, happens only once in their career so getting the right value is key.
Once you sell the shares in the business you will also use the valuation to account to HMRC for the capital gains tax on the sale. Regardless of who you sell it to HMRC will expect the sale to be at market value so understanding what that is will allow you to set aside funds to pay the tax.
Shareholder retirement / leaving /dispute
An increasingly common scenario after the pandemic is when one or more shareholders have simply had enough and want to leave the business or retire. The exiting shareholder will want to receive the money for his shares and may have a value in mind that the other shareholders don’t necessarily agree with.
Case study – retiring shareholder of XYZ Limited
XYZ Limited is a family business in the manufacturing sector with five brothers who were equal directors and shareholders. Each brother had a different and important role in the business, with the retiring shareholder responsible for sourcing new business.
The retiring shareholder had a figure in mind of £80,000 for his shares, based on a multiple of trading profits over the previous 3 years – usually an acceptable calculation of value. The remaining shareholders however pointed out that whilst he was basing his calculation of value on previous trading profits the business was unlikely to continue to deliver those profits in the future. The impact of his leaving would mean they needed to employ someone to do his role on a full salary (as opposed to the smaller tax-efficient salary the shareholder had been receiving) meaning the cost base was higher and therefore profits reduced.
The valuation of the business was key to understanding how the multiple of profits needed to be discounted for two things:
1) the impact of the shareholder leaving and the increased salary cost in the business to replace him.
2) the discount factor that needed to be applied to the valuation to represent the sale of a minority shareholding.
Understanding why a valuation is discounted due to the minority interests and the impact of future trading helps to form constructive discussions and agreements around what the shareholder can expect when leaving, which is much better to do in advance rather than once they have gone.
These things may not start as a dispute but often when a valuation that works for all parties can’t be agreed upon a dispute will arise meaning any negotiations to sell their shares back to the company or remaining shareholders end up being more acrimonious than ever envisaged.
Valuing your business isn’t necessarily straightforward and many factors need to be taken into consideration to ensure that the right valuation is made. Seeking professional assistance is always advisable and this is something that we can provide. We have a wealth of experience in providing valuations to businesses and supporting them through the sale of their business or exiting a shareholder.